Putting The Muscle Back In The Bull Stan O'Neal may be the toughest--some say the most ruthless--CEO in America. Merrill Lynch couldn't be luckier to have him.
By David Rynecki

(FORTUNE Magazine) – During the three years that Stanley O'Neal has run Merrill Lynch--first as president, then as CEO and chairman--he has cut 24,000 jobs, including 20% of all investment-banking and analyst positions. He has closed more than 300 field offices, shuttering operations in South Africa, Canada, Australia, New Zealand, and Japan. He has reduced the number of U.S. stocks traded by 75% and all but eliminated underwriting of commercial-paper, short-term bank, and agency debt. He has demoted or fired dozens of veteran executives. His main rival, asset-management chief Jeff Peake, was dismissed in 2001 via press release. Next was Win Smith, another division chief, whose father once ran Merrill. So, too, went almost every member of the executive management committee built by his predecessor; in its stead came a kitchen cabinet of nine executives--including one African-American male, one Korean, one Egyptian, and two American women--most of whom had almost no influence inside Merrill.

From the start he froze pay for everyone, cut bonuses, and took away the free gourmet food that had been prepared daily for the most senior executives. He has told every one of his direct reports that they are personally accountable for the profitability of the entire firm. These managers, in turn, have told their direct reports the same, creating a trickle-down of cost cutting that is encapsulated in the neat 12-page summaries now used to analyze the revenues, expenses, technology upgrades, and productivity of each component of the business. Through meetings, speeches, and one-on-one conversations, he has come back time and time again to the R-word, to use the language of one lieutenant: "Ruthless," O'Neal has said, "isn't always that bad."

In those same three years, O'Neal has earned a reputation as a "cold," "aloof," and "uninspiring" cost-cutter extraordinaire--a sort of ambitious bureaucrat determined to make an indelible mark on Mother Merrill, whatever the human toll. He and his team are portrayed as zealots intent on beating a new culture into the world's largest brokerage and investment bank. Some inside the company have dubbed the new leaders the "Taliban" for their blind faith. Critics have derided the 52-year-old O'Neal as "Mullah Omar."

And views outside Merrill aren't much different. One prominent brokerage CEO privately calls him a "stiff who needs a drink." A leading analyst describes him as a "classic bean counter."

It's easy to believe all that. And Stan O'Neal doesn't do much to dispel the myth. However, there is another description for Merrill's CEO--and this one is, frankly, more accurate: turnaround genius. Fact is, this hard-charging, steel-plated leader may have saved one of the great Wall Street institutions from extinction.

We'll get to that in a minute, but first a nod to the one aspect of Merrill's transformation that his critics rarely mention--performance. Under O'Neal, the once fat and merry Merrill has become the leanest and most profitable of any securities firm on Wall Street. Earnings for 2003 reached a record $4 billion--far better than even during the boom years of the late 1990s--as pretax profit margins have soared to a record 28%.

The recovering economy and improving stock market deserve some of the credit. But the rest goes to O'Neal. Virtually every Merrill unit is surpassing expectations. Merrill is bringing in more money per broker than any of its competitors. The investment-banking arm earned more from fees last year than Goldman Sachs or Citigroup. Shareholders, who have seen Merrill's stock soar 100% over the past 52 weeks (compared with a 60% return for the average big securities firm), didn't even blink when it was reported that O'Neal made over $28 million in 2003--making him one of the richest-paid executives on Wall Street.

This success is hardly lost on Merrill's rank and file, many of them old-guard survivors who never believed change was needed. There are still loud grumbles about the leadership style and strategy. But there is relief here too. Relief that the company is thriving again. Relief that sounded like jubilation on Jan. 22, the day Merrill reported its record profit.

At 4 P.M. New York City time, 48,000 employees were gathered in auditoriums in 35 countries to hear the news. It was delivered with a twist. In comic slow motion, Stan O'Neal was falling from the sky, strapped to a parachute; his vice chairman, Bob McCann, gun in hand, was gleefully shouting to the crowd that he had shot down the enemy. The videotaped scene, broadcast via satellite to Merrill's far-flung outposts, was supposed to be a spoof of the old TV show McHale's Navy. And it was supposed to reveal that O'Neal, the mean old number cruncher, could let himself be the butt of a joke. O'Neal shook his fist and yelled, "I'll get you for this!"

It turned out to be more than just a funny PR stunt. The audience seemed almost grateful for the opportunity to laugh--to celebrate strong financial results for the first time in years, and maybe even the man who had brought them.

O'Neal was relieved too. His jaw fell open in laughter as he watched the goofy skit.

When it came time to give his speech, O'Neal took the issue of the painful cost cutting head on. Numbers, he explained, were more than numbers. Each digit told a story about what Merrill could be. The kind of good numbers the company had reported equaled not only a jolt of confidence for investors but also stock buybacks (which Merrill would announce less than three weeks later, on Feb. 10) and the power to make strategic acquisitions down the line. The sacrifices Merrill's employees had made meant that the legendary firm could prosper in an increasingly competitive industry.

As little as two years ago, there was a possibility that Merrill (No. 58 on this list) would not make it back for another year. This was a shocking reversal for a company that had taken "Wall Street to Main Street" by selling countless investors their first stocks and bonds, and that had helped lead the FORTUNE 500's transition from its all-industrial roots to its present domination by service giants. Indeed, Merrill literally created many of the retail chains that have appeared on the list--from J.C. Penney to Safeway--through its ability to raise financing and distribute stock.

Merrill history was marked by one visionary leader after another. Founder Charlie Merrill developed the modern investment bank in the 1920s and then saved his investors untold millions by telling them to get out of securities in 1928. Win Smith Sr. built a network of brokerage offices during the 1940s when memories of the Great Crash still stung. During the 1980s and 1990s, CEOs William Schreyer, Dan Tully, and David Komansky launched a global expansion that put the "thundering herd," as Merrill was known, into India, China, and dozens of obscure markets. Merrill became the largest retail brokerage, the most active investment bank, and the most prolific underwriter of stocks and bonds in the world.

Then, like a latter-day Elvis, the legend became fat, irresponsible, and boozy with its past success. By the late 1990s, Merrill bankers were taking on more low-margin deals to maintain the firm's ranking in the influential industry league tables but overlooking the ultimate need for profits. Revenues soared at a 15% annualized rate for the decade, but expenses were rising at an almost parallel pace. In 1996, Merrill's profit margins were five percentage points worse than those of its rivals, on average. Two years later the gap had swelled to ten points. In 2000, the best year for investment banking in the history of Wall Street, Merrill's underwriting and advisory business eked out a $200 million profit.

The hallmark of the firm's performance was "mediocrity," says Ahmass Fakahany, now Merrill's CFO, who remembers management meetings that dwelled on inane topics like dress-down days instead of profitability. It took the market's crash in 2000 and subsequent recession to reveal the flaws. Merrill was the most vulnerable of the white-shoe securities firms because it was the sloppiest. Bar-room wagerers predicted Merrill would be gobbled up by a big bank before long. Indeed, shortly before O'Neal was named president in 2001, then-CEO Komansky had broached that very idea with Goldman, Deutsche Bank, and Bank of America.

O'Neal was one of few voices in the firm that seemed to even notice that Merrill had fattened itself for the slaughter. In a 1999 speech to more than 700 managers at a Manhattan hotel, the newly minted CFO outlined a proposal that included selling poorly performing businesses and realigning business units to shave technology and employee costs. But O'Neal wasn't given the power to put the plan in place. It wasn't merely the fact that during the raging bull market, size and glory and league-table victories were everything. All this talk of margins and segment profitability was coming from an outsider--a guy who'd never "written a ticket" (a reference to the old handwritten order forms for stock transactions) in his life.

O'Neal had joined Merrill in 1986 after working as assistant treasurer at General Motors. Raised on a farm in rural Alabama during segregation, he was educated in a schoolhouse built by his grandfather (a man who was born into slavery and whom O'Neal recalls with deep emotions). His dad got a job at a GM assembly plant outside Atlanta and moved the family there, where O'Neal thrived. He eventually earned a college scholarship and a trip to Harvard Business School--both paid for by GM. His background, however inspirational, was foreign to many Merrill-ites. He wasn't a broker, first of all. He was dour, stiff-shirted, uncompromising ... and black.

Throughout the company's history, nearly all the leaders had been two things: white Irishmen and former big-shot brokers. (While Komansky wasn't Irish, he had enough broker blarney to make him a folk hero among the troops.)

The only place O'Neal did seem to have allies was in the boardroom. Komansky and a few like-minded directors decided to let him test out his cost-cutting strategy on the ailing retail brokerage. Merrill had more brokers than any other firm, and revenues were growing fast--by some $3 billion, in fact, from 1996 to 1998. But amazingly, only $100 million of that increase had trickled down to the bottom line. O'Neal and James Gorman, a former McKinsey consultant, devised a plan to segment Merrill's nine million retail accounts, with the least profitable (meaning those with less than $100,000) being transferred to call centers and the biggest accounts being handled by teams of wealth-management experts. He also farmed out money-losing businesses like 401(k) management.

But mostly, he fired brokers--2,000 of them--along with support staff. Profit margins shot up from 11% to 16.7% in a year and stayed that way throughout the bear market.

Within months, the board was back with a bigger job for O'Neal. As Gorman, now head of Merrill's retail brokerage puts it, "Stan was made CEO at the ultimate moment of truth. Our world was imploding, and he had the courage to make difficult decisions. If that's not heroic, I don't know what is."

Stan O'Neal can be blunt. ("I don't care if your readers know who I am," he told FORTUNE, in his matter-of-fact manner.) He can be awkward in public, often falling back on jargon when trying to connect with his own employees or in media appearances. He prefers to work--rather than talk--through lunch (which is almost always fresh fish with a bottle of spring water and almost always served at his desk). He is a man of strict habits (exercising at 5 P.M. in the tiny gym behind his office) and beloved routines (spending weeknights at home with his wife, Nancy, a former finance executive at GM and Honeywell, and their 12-year-old twins).

He is not much of a communicator--at least to those who don't know him well. Instead, O'Neal has relied on the eloquence of his message. Merrill is moving from good old boy's club to meritocracy --a progression that will continue, he promises.

That transformation began, in fact, the moment O'Neal became Merrill's president in 2001. And the timing couldn't have been more awkward. Within weeks of his promotion, the Sept. 11 attacks displaced Merrill from its headquarters. The company was in utter disarray; thousands of employees who had fled from the falling Twin Towers were left shaken. O'Neal decided he would press on with the restructuring anyway.

In early October, with management spread across six makeshift locations, he gathered executives via conference call to discuss his plan for a major corporate overhaul. He asked those on the call for their candid responses. Some wondered out loud why the changes had to be made so soon after the tragedy. The consensus, however, was that Merrill needed to restructure right away rather than wait six or nine months and have the financial troubles escalate. The next day he opened the Wall Street Journal to find his plan spread across the front page of the Money & Investing section--even the pie charts were there. The story made him look as though he was using Sept. 11 as an excuse to fire people.

Outraged, he held a second conference call, angrily telling his senior staff that the leak had undermined the entire company. The next day he arrived at work to find his words in the newspaper.

Disgusted, O'Neal tried to quarantine Merrill from the media and avoid public appearances. "We simply couldn't explain ourselves to everyone," O'Neal says now. "We had to focus all our energy on executing the plan."

And that plan was brutally ambitious. Profit margins for the entire company--the best measure of efficiency--would rise from 17% in 2001 to 24% by 2003, he demanded. (Merrill would beat that goal by four percentage points, as it happens.) O'Neal went through his senior ranks and weeded out everyone he thought would have a problem making the necessary changes. He promoted a generation of younger, more aggressive executives, several of whom had been frustrated in secondary roles for years. He then entrusted each business head with achieving results.

Surprisingly, O'Neal was very hands-off during this process. Vice chairman McCann, for example, says that as head of research in 2002, he was never told by O'Neal to cut heads or reduce compensation. Then again, he didn't need anyone to tell him; the unit had gotten bloated and inefficient as spending had soared 100% during the previous five years. The head of global markets and investing, Arshad Zakaria, cut low-margin Nasdaq stock trading and junk bonds and built up such understaffed departments as foreign-currency trading, bonds, and mortgage issuance. Since then banking and trading margins have gone from 20% to 40%. In the asset-management division, margins improved almost unthinkably, from 0.8% to 20%.

Despite these obvious achievements, many mid-level employees (and exiled executives) continued to whisper--always off the record--that O'Neal didn't get it. Those whispers grew louder last summer after O'Neal fired two of his once-closest allies, Zakaria and CFO Tom Patrick.

O'Neal is clearly aware of such nasty talk, but he won't relent on his plan. It is still do-or-die time at the firm that Charlie Merrill built in 1915. And Merrill Lynch's 11th CEO is heading back from an exhausting four-day European mission. In the brief stretch, O'Neal has held more than 20 meetings with corporate clients, government officials, and firm employees in London, Berlin, Rome, and Milan. He looks exhausted as he slumps into the back of his Sikorski helicopter for the ride from New Jersey's Teterboro Airport to Manhattan.

The rumor swirling this week is that O'Neal ordered a $3 million refurbishment of the company jet because he didn't like the toilet. (It isn't true.) "People say all these things about me," he acknowledges in a rare moment of frustration. "They say I'm a bean counter. I'm not. I spend so little time thinking about numbers they wouldn't believe it. But if people want to say that, I can't do anything about it. I have a job to do, and it has nothing to do with worrying about what people call me."

Moments later, he lands in Manhattan and climbs into a waiting sedan that soon heads north on Park Avenue. He says that now, with his desired profit margins in reach, he is once again focused on growth--slow, safe growth, that is. That process has already begun. In recent months Merrill announced that it had begun hiring more brokers to cater to its expanding list of millionaire clients.

Some Merrill watchers are speculating that O'Neal may even begin soon to make acquisitions. The company has $10 billion in cash and equivalents and half-a-trillion dollars in assets. No surprise, O'Neal won't hint, wink, or smile at the suggestion. If he has learned anything these past three years, it is to keep quiet about his plans.

At his Park Avenue home, the Merrill CEO steps out of the car and, for a second, ducks his head back inside for one last word. "People have always underestimated me," he says, closing the door. "I'm counting on that not to change."

FEEDBACK drynecki@fortunemail.com